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Published: Fri, 02 Feb 2018

Principles of constructive and resulting trusts

In its exploration of the underlying principles of constructive and resulting trusts, this essay proposes to closely examine several cases which have helped shape, define, and in some cases actually create what we now know as the resulting and constructive trust respectively. We will examine the extent to which these cases have brought together the two institutions or, conversely, the extent that they have helped distinguish them and keep them apart.

The area in which both types of trust come together most explicitly is in the area of the matrimonial home. The starting point of this fusion can be found in the leading House of Lords case of Gissing v Gissing[1].

Before analysing this case, it is important to consider the traditional approach of equity to the position of the housewife as regards the beneficial interest of the family home transferred into the sole name of her husband. Before the twin cases of Pettit v Pettit[2] and Gissing v Gissing, in cases where there was no legal agreement that both spouses would share the beneficial interest of the property, the wife’s interest in the property was only recognized by the law when she had made direct payments towards the purchase price of the property. In such cases the law would presume, from the contribution, a common intention of the parties that the legal owner would hold on trust for himself and his/her cohabitee as beneficiaries. This is what is known as a presumed resulting trust. The presumption of a common intention, which may be rebutted, arises by law; not on the facts.

Now let as consider the implications that this has on the cohabitee who has not made a direct contribution to payment of the property. In relation to married couples, most housewives make no such direct contribution, even though they can often be seen as contributing indirectly by other means. The housewife, therefore, who contributes indirectly to the family home by paying bills and housekeeping, thereby allowing her husband to take care of the mortgage payments, would have no claim on the beneficial interest. This perceived injustice is, I would submit, what prompted the landmark decision by the House of Lords in the case of Gissing v Gissing.

In Gissing Lord Reid begins his judgment by addressing the inadequacy of the law in its reflection of the way that families, in reality, conduct their affairs, particularly as regards the family home. Lord Reid refers to the ‘common case’ where the husband and wife acquire a home in the husband’s name although they both agree that the wife should make a financial contribution. This arrangement, Lord Reid tells us, may take one of two forms: the wife may either make direct contributions to the price of the property, or she may choose to relieve some of the husband’s obligations by helping pay for bills and housekeeping. The latter, Lord Reid claims, is often the most convenient way. Furthermore, Lord Reid tells us, neither spouse gives much thought to the legal consequences, and the law fails to deal with this reality appropriately:

As I understand it, when the wife makes direct contributions to the purchase by paying something either to the vendor or to the building society… she gets a beneficial interest in the house although nothing was ever said or agreed about it at the time; but that, when her contributions are only indirect by way of paying sums which the husband would otherwise have had to pay, she gets nothing unless at the time of the acquisition there was some agreement that she should get a share. I can see no good reason for this distinction and I think that in many cases it would be unworkable.[3]

With respect, I would submit that although this may be true in reality, in law there are various important reasons for this distinction, and that it is precisely the failure to recognize them and define the boundaries of constructive and resulting trusts, which has led to the great uncertainty in this area of law to the present day.

Lord Diplock’s judgment in Gissing effectively created what is now referred to as a common intention constructive trust. Essentially Lord Diplock held that where the legal title to a property was owned by one person, cohabitees would be held to share a beneficial interest in the property even if they had not contributed directly to the purchase price (thus falling beyond the protection of the resulting trust) as long as they could provide evidence that both cohabitees had a common intention that the beneficial interest would be shared, and that the legal owner had induced the beneficiary to act to his own detriment in reliance of this agreement. Crucially, however, he saw no need to properly establish the boundaries of this principle, or to distinguish common intention constructive trusts from implied or presumed resulting trusts.

A resulting, implied or constructive trust – and it is unnecessary for present purposes to distinguish between these three classes of trust – is created whenever the trustee has so conducted himself that it would be inequitable to deny the cestui que trust a beneficial interest in the land acquired. And he will be held so to have conducted himself if by his words or conduct he has induced the cestui que trust to act to his own detriment in the reasonable belief that by so acting he was acquiring a beneficial interest in the land.[4]

With common intention constructive trusts the common intention as to the beneficial ownership of the property must be proven, on a balance of probabilities, on the facts. Therefore, a spouse would have to provide some evidence for the courts to infer that an intention had in fact existed. This can be distinguished – and it is submitted that the distinction is crucial – from a presumed resulting trust where the presumption as to a common intention arises by operation of law by virtue of a monetary contribution to the purchase price. A presumed resulting trust and a common intention constructive trust therefore arise in very different ways. Moreover, not only the nature but also the consequences of each are crucially different. With a presumed resulting trust, the presumption is that there was an intention that both parties would hold a share proportionate to their direct contribution to the purchase price whereas with a common intention constructive trust the courts adopt a ‘broad brush’ approach when determining how the parties intended the beneficial interest to be divided. For this reason I believe that the distinction which Lord Diplock felt was unnecessary, could not, in reality, have been more crucial. His failure to properly distinguish between resulting and constructive trusts has led to a very dangerous ambiguity and uncertainty in this area of law, which has ever since threatened to defeat precisely what Lord Diplock’s set out to achieve: the protection of the cohabitee with no legal title.

The failure to make this distinction, and to lay down clear and recognizable boundaries between what are two very different principles of equity, has led to ambiguity, confusion, and as a result, to inconsistency in the application of the law. The Court of Appeal, in such heavily criticised cases as Eves v Eves[5] seemed to favour the approach that as a result of Gissing, equity would award a cohabitee a beneficial interest in the property when, “in all fairness” he/she deserved it. This type of arbitrary approach has very negative implications for the rule of law, and can be seen as a regressive step towards a time when the protection provided by equity was generally regarded to be as ‘long as the chancellor’s foot’. By overly stretching, extending and developing principles of equity in line with subjective criteria such as ‘fairness’, the courts can be seen to have undermined and prejudiced the very protection they sought to provide. By allowing flexibility to outweigh certainty, application of the law comes in danger of becoming arbitrary, and justice, in a way, defeats itself. This is exemplified by comparing the Court of Appeal’s decision in Eves v Eves with, for example, Burns v Burns[6]. On similar facts, one court found for the defendant whilst the other found for the claimant. No doubt the claimant in the second case may have relied on the previous decision, and had a right to believe that his interest would be protected by the courts. A legitimate expectation had been created, on which the claimant may well have relied when conducting her affairs; yet this expectation was frustrated, and, in this respect, justice was denied.

In Lloyds Bank plc v Rosset[7] Lord Bridge clearly laid down the rules governing what would amount to a constructive trust. He held that there were two different ways in which such a trust could arise. Firstly, a constructive trust could be established when there was evidence of a common intention, based on “express discussions between the partners, however imperfectly remembered and however imprecise their terms may have been”. Once this has been established, the claimant need only show that he/she has relied on this agreement to his/her detriment.

Secondly, then, is the situation where there is no evidence of a common intention. In Lord Bridge’s words: “In this situation direct contributions to the purchase price by the partner who is not the legal owner, whether initially or by payment of mortgage installments, will readily justify the inference necessary to the creation of a constructive trust.”

It is submitted that what Lord Bridge defines as the second category of constructive trust where the interest is created by virtue of a direct contribution to the purchase price is in effect neither more nor less than a presumed resulting trust. Lord Bridge, nevertheless, describes this as a constructive trust. Whilst Lord Bridge set out to establish the boundaries of the constructive trusts, it is respectfully submitted that in effect he blurred the already dubious distinction between constructive and resulting trusts.

The repercussions of this were most clearly manifested in the Court of Appeal case of Midland Bank v Cooke[8]. In fact, Waite J’s judgment in that case can be seen as a celebration of the fusion of both types of trust in this area of the law and the flexibility that this provides.

Here, Waite J held, in essence, that the mere existence of a direct contribution to the purchase price opens the door to an interest proportionally greater than the original payments, even when, as was the present case, there is in fact positive evidence that no agreement as to a common intention was ever reached. It is hard to find any rationale for this conclusion. Waite J seems to have held not only that a common intention trust can ride on the back of a resulting trust, but all the more worryingly, that an interest created by a direct contribution can be increased on the basis of an intention that, in fact, never existed. In the words of Martin Dixon:

Surely it cannot be the case that whereas the court is prepared to find a constructive trust only on the back of an express agreement or promise (Rosset route 1) it will at the same time be prepared to quantify an interest generated by purchase payments on the back of a completely fictitious one?[9]

Waite J’s judgment exemplifies the inherent dangers of failing to establish fixed principles of law. Lord Diplock’s failure to properly frame the principles he had developed in Gissing allows, and even encourages judges to approach the area with a ‘free hand’ attitude. In other words, a person other than a legal owner is held to be entitled to a ‘fair’ share of the property as long as he can show that the legal owner holds the property on either an implied, resulting or constructive trust. The added fact that the three examples fall within s. 53(2) LPA 1925 has led judges to believe that all formalities or formal principles may, as a result, be dispensed with.

Having no clear guiding restrictions, Waite J brought together the common intention constructive trust and the resulting trust in a very dangerous way, and then, moreover, extended their principles:

Positive evidence that the parties neither discussed nor intended any agreement as to the proportions of their beneficial interest does not preclude the court, on general equitable principles, from inferring one[10].

I would submit that the courts are indeed precluded from finding such an intention. Again in the words of Martin Dixon, ‘the courts have no business engaging in fictions’, and therefore when there is unquestionable evidence that no agreement exists, the courts are quite clearly departing from their judicial role if they hold that one does exist. For this reason I would respectfully submit that the reasoning in Cooke is flawed. However, considering the approach of the courts in cases such as Gissing, Tinsley and Lloyds Bank v Rosset, one cannot say that Waite J’s judgment is unprecedented. I would submit, in fact, that it was an inevitable consequence of the courts’ failure to qualify Lord Diplock’s judgment in Gissing, and the confusion that this has created.

Today, in fact, the situation is as ambiguous as ever. In the case of Oxley v Hiscock (Application for Permission to Appeal)[11], the trial judge was faced with a situation where she had to decide whether the proceeds from the sale of a property was to be divided using the resulting trust approach or the common intention trust approach. By now the law surrounding this area had become so ambiguous, particularly since Midland Bank v Cooke, that it was unclear which test applied. Since Midland Bank it seems that “… the duty of the judge is to undertake a survey of the whole course of dealing between the parties relevant to their ownership and occupation of the property and their sharing of its burdens and advantages.”[12] It is submitted that this test is somewhat subjective and arbitrary and, moreover, fails to acknowledge any clear and recognized boundaries between resulting and constructive trusts. The Judge must simply look at the whole course of dealings which are in his or her opinion relevant to ownership. It is submitted that in terms of a guiding principle or rule, this leaves a lot to be desired. As a result, it is submitted, the law in this area is now in a somewhat unsatisfactory condition, and there is no longer a clear distinction between resulting and constructive trusts.

One has to accept that flexibility is one of the most essential and defining qualities of equity, and nowhere is this more clearly manifested than with constructive trusts. But no matter how flexible the principles, it is submitted that they must be clearly distinguished and established within a clear framework if they are to be capable of consistent application and enforcement. We have seen that the lack of such a framework can lead to a blurring of principles and confusion as to what the law is. This, in turn, produces an inconsistent and arbitrary system of law incapable of protecting the individual.

Word Count (excluding quotations):2228

BIBLIOGRAPHY

ARTICLES

S Baughten, ‘Estoppel over land and third parties. An open question’ (1994) 14 LS 147